The Problem with Perpetuity

A missed opportunity to clarify an important aspect of contract law.

It is often said that the only certain things in life are death and taxes. To that, one might be forgiven for suggesting that another certainty is that nothing is forever, although diamond lovers may beg to differ.

Most modern legal relationships are not built on notions of eternity. To give but one example, in the context of private trusts there has existed, almost since time immemorial, the fundamental rule against perpetuities which prohibit the creation of future interests in property after a certain prescribed period. The law sets its face against control over property for an indefinite period, resting on the policy that ownership of property should be enjoyed by man and not dictated by mortmain.

Commercial relationships are generally speaking not intended to be perpetual in nature. It is an inherent feature of commerce that the rights and interests of parties do not stand still and are in a constant state of flux, having regard to multifarious factors (be it legal, commercial or even political). Times change. Relationships fall apart. Committing to a permanent or irrevocable contractual relationship, with limited scope for amendment thereto or right of extrication therefrom, is on any view an act of supreme commercial folly.

In practice however, difficulties may arise when contracts drafted between commercial parties (usually but not invariably in the case of contracts for the supply of services) do not contain express terms as to contract duration or the right of termination. This may then give rise to issues as to whether such contracts are intended to be perpetual in nature, and in what circumstances can a contract which is silent as to duration be terminated in the absence of any fundamental breach of the terms therein. Leaving aside cases of consumer contracts protected by legislation, this is of particular importance where the commercial contract in question is highly favourable to the supplier and/or vendor, or is substantially onerous or unfair to the customer.

It is therefore a pity that the Federal Court in the recent case of Ng Chin Tai v. Ananda Kumar a/l Krishnan (Civil Appeal No. 02(f)-97-09/2017(P), 17 October 2019) declined the opportunity to provide guidance on the interpretation of contracts alleged to be perpetual in nature, and in what circumstances are commercial contracts subject to an implied term as to termination upon reasonable notice.

In Ng Chin Tai, the plaintiff and the 1st defendant had entered into a brokerage contract in respect of services rendered by the plaintiff in securing a contract for the 1st defendant for the supply of seafood to a well-known hypermarket known as Tesco. The contract provided in respect of the plaintiff’s commission:-

“This fee of 5% (five percent) shall be paid to Mr Ananda Kumar a/l Krishnan for the duration of the period that Lean She Fishery or any of its Associates and/or Associate Companies and/or related Parties supplies Seafood to Tesco Stores (M) Sdn Bhd.”

The 1st defendant paid the plaintiff the 5% fee on a weekly basis until the end of 2005, and then sought to unilaterally terminate the contract with the plaintiff. The 1st defendant stopped supplying seafood to Tesco in about September 2006, and the supply was instead taken over by the 2nd defendant (a company which was owned and controlled by the 1st defendant) until late 2015. The plaintiff instituted a suit against the defendants seeking payment of commission premised on the 1st defendant’s breach of contract.

The High Court allowed the plaintiff’s claim, holding that the 1st defendant was in breach of contract, and lifted the corporate veil essentially on the basis that the 2nd defendant was incorporated to allow the 1st defendant to evade his liability towards the plaintiff.  The court then awarded the plaintiff damages in the sum of RM19,266,746.16, based on 5% of the profits made by the 2nd defendant from late 2005 to December 2013 in respect of the supply of seafood to Tesco. This award of damages was upheld by the Court of Appeal.

The defendants obtained leave to appeal the Federal Court premised on, inter alia, the following question of law:-

Whether a contract for payment of commission may last in perpetuity without being subject to an implied term as to termination upon reasonable notice?

However, having reviewed the terms of the brokerage contract and the findings of the lower courts, and while observing in passing that “[w]hilst the Contract does not contain a termination clause as such this does not mean that it is a contract of indeterminate duration”, the Federal Court held that the brokerage contract between the parties was not, on the facts of the case, one in perpetuity.  As such, the Federal Court concluded that there was “no purpose in answering” the said question of law, as the question “is premised on the presumption that the Contract is perpetual in nature”.

It is regrettable that the Federal Court did not avail itself of the opportunity to provide its views on the questions of law and the legal issues which arose, as this is an area of law which is of significant importance in commercial contracts and to the business community, both from a legal and practical point of view.

There is a long line of authorities which suggest that where a commercial contract does not contain express terms as to duration or termination, there would be an implied term that such contract may be terminated by giving reasonable notice: see for example Martin-Baker  Aircraft  Co  Ltd  v.  Canadian  Flight  Equipment  Ltd [1955]  2  QB  556; Australian  Blue  Metal  Ltd  v.  Hughes [1963] AC 74 (House of Lords); Winter Garden Theatre (London) Ltd v. Millennium Productions Ltd [1948] AC 173 (House of Lords); Hillis Oil & Sales Ltd v. Wynn’s Canada Ltd [1986] 1 SCR 57 (Canadian Supreme Court).

In Malaysia, this principle appears to have been recognised by the Court of Appeal in Masjaya Trading Sdn Bhd v Kedah Cement Sdn Bhd [2004] 4 CLJ 18 at pp. 28 – 29. However, the decision of the Court of Appeal in Kedah Cement was reversed by the Federal Court on a different point (see Kedah Cement Sdn Bhd v. Masjaya Trading Sdn Bhd [2007] 3 MLJ 597). So it would appear that the appellate courts yet to have the last word on the matter.

Until authoritative guidance is provided by the appellate courts, commercial parties would do well to exercise caution in drafting commercial agreements, with particular attention to be given to provisions governing contractual terms and duration, as well as the circumstances in which a contract can be terminated in the absence of prescribed events of default.

Whether a contract is truly intended to be permanent in duration depends on the interpretation of the terms of the contract in each case. If it is found to be so, then the question of implying a term as to termination by reasonable notice simply does not arise: the two are mutually exclusive.

In the rare case where a contract is intended to be perpetual in nature, it is perhaps worth bearing in mind that, whatever the practical difficulties that might arise, the concept of perpetuity is best declared than left unspoken. For in the world of commerce, eternity is truly a hard sell.